Glossary of investment terms

Explore what some commonly used investment terms mean in practice

A-D

A

Active management

A style of investment management where the fund manager aims to outperform a benchmark by superior asset allocation, market timing or stock selection (or a combination of these). Compare with passive management.

Activity Portfolio

The Activity Portfolio is that part of the portfolio of a (dynamic) capital preservation fund that invests in international financial markets with the aim of participating in the movements on these markets. Investments are usually made in foreign-currency bonds and in equities.

Affidavit

See bank declaration.

Alpha

A fund's alpha is its outperformance relative to a benchmark. It is often used loosely to describe the amount of investment return an active manager adds from their management of the fund. If a fund has a consistently high alpha this can indicate skilful management. For example if the benchmark returns 12% and the portfolio returns 14%, the outperformance (alpha) is equal to 14% - 12% = 2%. Compare with beta.

Annual report/semi-annual report

For each fund it manages, the management company publishes an audited annual report within four months of the close of the financial year and an unaudited semi-annual report within two months of the end of the first half of the financial year. The annual report contains e.g. the annual financial statements, the statement of changes in the fund's net assets, the structure of the portfolio and the auditor's report. The semi-annual report contains the most important half-year results.

Arbitrage

Exploiting price differences in the same securities or related assets - be it locally or internationally - whereby the securities are bought on the market offering a lower price and sold on the market offering a higher price.

Asset allocation

The strategic investment of the available assets in different asset classes, such as money market instruments, bonds, equities, real estate, etc. The portfolio is also broken down by sector and according to geographic and currency criteria.

Asset allocation funds

Investment funds which replicate the investment strategies of the providers for the various risk classes. Asset allocation funds invest worldwide in various instruments, depending on the risk category equities or bonds are overweight. Also known as strategy funds, portfolio funds, investment objective funds, asset management funds or mixed funds.

Asset class

A collective term for investments of a similar type with a unique combination of investment characteristics. The main asset classes are equities (shares), bonds, cash and real estate.

Asset manager

See portfolio manager.

Asset value

The net assets of a fund divided by the number of units in circulation.

Auditors

An organisation independent of the fund management company and the custodian bank which regularly monitors compliance with the legal regulations. Auditors must be recognised by the supervisory authorities, which in Switzerland is the Federal Banking Commission.

Average Life

Weighted average time in years for which each a unit of unpaid principal on an investment remains outstanding. The longer capital from the original investment is held (longer average life), the longer it is exposed to risks like inflation, interest rate risk or credit risk.

Average residual term to maturity

The residual term to maturity is the remaining life of a bond up to its final due date. In a fund, the average residual term to maturity is calculated from the weighted residual maturities (weighted according to capital invested) of all bonds held in the fund.


B

Basis point

One hundredth of 1% (i.e. 0.01%). Also referred to as bps.

Bear market

A market where prices decline against a background of widespread pessimism. Compare with bull market.

Benchmark

Index against which an investment fund's performance is measured. Also called a reference index.

Beneficial owner

The person or persons who have ultimate rights to the value of an investment or property, as distinct from the registered owner who may be a nominee.

Best execution

The duty of an investment firm to take all reasonable steps to obtain, when executing orders on behalf of clients or decisions to deal, the best possible result for those clients taking into account factors such as price, costs, speed, likelihood of execution and settlement, size, nature and any other consideration relevant to the execution of the order.

Best-in-class principle

In addition to traditional financial analysis, SRI company analysis also looks for the companies in selected industries that best meet environmental and social criteria (the best-in-class principle).

Beta

A measure of risk which indicates the sensitivity of an investment, such as an investment fund, to fluctuations in the market, as represented by the relevant benchmark. For example, a beta of 1.2 tells us that the value of an investment fund can be expected to change by 12% if the market is forecast to move by 10%. The relation is based on historical data and is only an approximation. However, the closer the correlation between the benchmark and the investment fund, the better this approximation. Compare with alpha.

Bid-offer spread

The difference between the price at which financial securities and units in a pooled fund can be sold (bid price) and bought (offer price). Compare with single price.

Blue chip

Term used to describe equities of leading companies with top-class credit ratings, high market capitalization, strong earnings power and sound financial structure.

Bond

Debt instruments with a fixed coupon, at times also with a variable rate of interest and generally with a fixed maturity and redemption date. The most common issuers are major companies, government bodies such as the federal government and the cantons, public institutions and international organisations such as the World Bank or the International Monetary Fund.

Bond funds

Investment funds which invest in bonds and other fixed or variable interest securities. Bond funds generally have a specific reference and investment currency.

Bonds in default

Bonds which do not make their interest payments or redemption on the scheduled due dates.

Book profit /loss

The theoretical profit or loss on an investment due to its rise or fall in value, as long as the investment is not actually sold.

Borrowing

This refers to the liabilities of the fund before liquidation taxes as a percentage of the total fund assets.

Broker

A firm that provides investment research and execution services.

Bull market

A market where prices increase against a background of widespread optimism. Compare with bear market.

Business year

See financial year.


C

Call options

See options.

Capital preservation fund

An investment fund that enables investors to benefit from advances on the financial markets while providing a large measure of protection against losses exceeding a specified percentage. UBS offers two types of capital preservation funds: Limited Risk Funds and Dynamic Floor Funds.

Capitalization rate (static discounted cash flow method)

It is made up of the charges on a property (interest costs, fees, operating expenses, insurance premiums, maintenance and repair costs, amortization/depreciation of buildings, risk of rental losses, administrative costs) and is expressed as a percentage of the capitalised-income value. As one of the elements used to calculate the capitalised-income value, the capitalization rate is determined by an independent expert based on expenses which are expected to be incurred in connection with the property.

Capitalised-income value

This is calculated on the basis of current rental income and a property-specific interest rate (capitalization rate). Rental income must seem appropriate and obtainable over the long term in order to be fully included in the calculation. The capitalised-income value is the major factor used in valuing income properties.

Cash flow

Cash flow represents the net income earned in a financial year before write-offs and provisions.

Cash flow yield

Net income earned before write-offs and provisions in proportion to the current market price, less the accumulated earnings included in this price.

Certificate

The document evidencing ownership of stocks, shares or unit trusts confirming relevant registration details. See also Crest.

Class action

A class action arises when a group of investors initiates a legal action against a company or ist directors in respect of alleged negligence or illegal behaviour. The majority of class actions are initiated in the US. The case usually involves a claim for compensation in respect of share price losses in a specified period.

Closed-end fund

An investment fund in the form of a company (normally a stock company) with fixed capital. A closed-end fund is not obliged to redeem issued units at the request of the unitholder. Units of this type of investment fund may not be sold publicly under Swiss law. As opposed to an open-end fund.

Collateral

Assets put up as a security that a future financial obligation will not be met. Security for a credit or other liability, usually in the form of something readily convertible into cash, e.g. bonds and shares. UBS ETFs engage in securities lending for select physically replicated ETFs. Before borrowers receive the securities from the ETF (securities lending) they must provide the lender – the ETF – with collateral. The collateral assets serve to secure the borrower's obligations to the lender. The collateral is transferred to a completely separate custody account or collateral account that is ring-fenced from the lender's balance sheet.

Collateral security margin

The margin or difference between the market value of collateral and the credit granted or securities lent. This margin is demanded by the bank or fund to cover itself against any possible decline in the value of the collateral. See also haircut

Collective investment contract

The collective investment contract is the legal basis for the investment fund business in Switzerland. This agreement is concluded between the management company, the custodian bank and the investor. It is the legal basis for the management of the investment fund by the management company on the one hand and for the participation of the investors in the assets of the investment fund on the other. The collective investment contract is embodied by the fund regulations.

Collective investment scheme

A fund in which several investors hold units. The assets are not held directly by each client, but as part of a ''pool''. Unit trusts and OEICs are types of pooled funds.

Commissions

Issuing commission and redemption commission. Fee charged on the subscription or redemption of fund units.

Commission de Surveillance du Secteur Financier

The "Commission de Surveillance du Secteur Financier" (CSSF) is the state supervisory authority which monitors the investment fund business in Luxembourg.

Commodity

A tradeable item that can be further processed and sold. Industrial (metals), agricultural (wool, wheat, sugar) and bulk commodities (coal, iron ore) are examples. It is possible to invest in physical commodities or in derivatives based on commodity prices.

Commodity funds

Investment funds which invest the assets primarily in tradable commodities or futures, via a swap.

Commodity Traded Advisor (CTA)

CTAs invest exclusively in futures and other derivatives. The majority of CTAs pursue a trend-following strategy. This acknowledges the fact that temporary trends do exist on the financial markets. Trend followers replicate a trend and stand to gain during both bull and bear market periods. A further strategy is to identify exactly when these changes in trends occur and to profit from them.

Contract form

An investment fund which has no legal personality. By purchasing units, the investor concludes a collective investment contract with the management company and the custodian bank. The unit holder does not have any rights of ownership to the fund assets, but rather a claim to participate in the assets and income of the fund. As opposed to a corporate form.

Convertible bonds

Bonds which feature a conversion right entitling the holder to convert the bond into shares of the company in question at a certain point in time and at a conversion ratio set in advance. Following the conversion, the bond expires.

Core Portfolio

The Core Portfolio is that part of the portfolio of a (dynamic) capital preservation fund that serves to ensure that the capital is preserved. Investments are generally in money market instruments and bonds in the fund's reference currency.

Core/satellite strategy

In a core/satellite strategy approach, invested capital is divided into a core and smaller individual investments (satellites). The bulk of the capital, the core investment, is invested in broadly diversified investments designed to achieve a stable market return with low risk and with the least possible deviation from the benchmark. That is why standard or blue chip indices are particularly suitable for a core investment. UBS ETFs offer a very straightforward and inexpensive way to implement this approach. The smaller portion of the capital is invested in a flexible manner in multiple satellite investments. The most suitable investments using this approach are those that have the potential to achieve above-average returns, complementing the core investment. They include investments in specific regions (e.g. emerging markets), sectors (e.g. infrastructure), strategies (e.g. mid-caps) and asset classes (e.g. commodities). Because they can be traded both on the stock exchange and over the counter in a quick and cost-effective manner and are available on a wide range of indices, UBS ETFs are suitable for both the core and the satellite component of a core/satellite portfolio.

Corporate bond

Strictly speaking, corporate bonds are those issued by companies. Generally, however, the term is used to cover all bonds other than those issued by governments in their own currencies. Therefore the ‘credit’ sector, as it is often known, includes issues by companies, supranational organisations and government agencies. The key feature that distinguishes corporate bonds from government bonds is the risk of default – see credit risk.

Corporate form

An investment fund which has its own legal personality, usually a joint-stock company. The units are issued in the form of equities. The investors are shareholders and have both proprietary and membership rights. The Swiss Investment Fund Act does not recognise funds set up in corporate form, but it is widely used in other parts of Europe and the United States.

Corporate governance

According to an OECD study, corporate governance describes the ways in which mutual responsibilities are distributed between a company's management and its shareholders.

Corporate social responsibility

Corporate social responsibility may be defined as transparent corporate conduct, which is based on ethical values and takes into account the interests of employees, society and the environment, thereby seeking to create sustainable value for the company and its shareholders (Definition: Prince of Wales Business Leader Forum).

Correlation

A measure of the degree to which the price trends of various investment categories or instruments move in the same direction. The correlation quantifies the strength of the relationship as a figure between -1 and +1. The closer the coefficient is to 1, the stronger the correlation. If the coefficient is -1, the investments and the benchmark move in opposite directions. If the value is 0 there is no correlation.

Cost averaging

Cost Averaging. Strategic exploitation of price fluctuations. This method of investing takes advantage of regular payments. The investor invests the same amount every month, and thus acquires more units when the issue price is lower and less units when it is higher. Over the long term, the investor thus attains a more favourable cost price than with the regular purchase of a fixed number of units over the same period of time.

Counterparty

The other party with whom a transaction is made.

Country fund

An investment fund which invests primarily in equities of a specific country.

Coupon

The regular interest payment due on a bond. Expressed as a percentage of the nominal value of the stock.

Coupon yield

Annual interest paid out on a coupon

Creation units

Using creation and redemption procedures, new ETF units are issued and existing units are dissolved. This mechanism allows professional market participants to trade baskets of stocks with the same composition in exchange for ETFs - and vice versa - with the fund company. This makes the ETF units more liquid.

Credit rating

Measurement of the quality of a borrower, particularly in respect of solvency and willingness to pay. The credit rating makes it possible to draw conclusions regarding the quality of bonds and the probability that interest payments will be made regularly and that the principal amount will be repaid at maturity.

Credit risk

Risk of the issuer of a bond becoming insolvent. See also credit rating.

Credit spread

Incremental yield over the benchmark risk free government issue.

Crest

A service which enables the securities of UK registered companies to be held and transferred between members of Crest without the need for paper-based certificates and transfer forms.

CSSF

See Commission de Surveillance du Secteur Financier.

Currency hedging

Currency risk can be mitigated by hedging using derivatives.

Currency of account

Currency in which the fund's accounts are kept and in which the net asset value and the issue and redemption prices are calculated. Not to be confused with the investment currency or the reference currency.

Currency swap

(1) Also referred to as a swap. An arrangement in which a currency is sold at the spot rate and then immediately repurchased forward or the other way round. Currency swaps are used to hedge currency risks on export credits. See also spot transaction. (2) Also referred to as a swap, cross-currency swap. Swap of a capital sum together with the related interest payments in one currency into a capital sum and the related interest payments in another currency.

Custodian bank

The custodian bank is responsible for keeping the entire assets of the fund in its custody and for the issue and redemption of fund units. It ensures that the fund management company complies with the provisions of the Investment Fund Act and the provisions of the fund prospectus.

Custody account administration fee

Fee charged annually for the safekeeping and administration of securities.

Custody/Custodian

Custody is the administration of securities by a financial institution; known as the custodian. The custodian is the primary record keeper of a client’s investments and collects income, processes tax reclaims and provides other services, according to client instructions.

Customised benchmark

A benchmark specifically constructed by a client rather than using an industry standard.


D

Debtor risk

See credit risk.

Derivatives

Financial instruments, such as options or futures, which are derived from underlying instruments, frequently equities or foreign exchange. In portfolio management, derivatives can be used to reduce the risk of capital losses.

Distribution

The distribution of income generated by the fund to the unit holders.

Distribution fund

An investment fund which distributes the income generated to its unit holders. As opposed to a reinvestment fund.

Diversification

The distribution or spread of investments across a variety of different individual stocks, sectors, countries and currencies. Diversification, or the spreading of risk - a characteristic common to all investment funds - is regarded in modern portfolio theory as the key factor in reducing risk. Systematically distributing investments over a number of securities spreads risk so that the total risk of a portfolio is significantly lower than that of the individual securities. Should investments also be diversified across various investment instruments, equities, bonds, money market paper, risk is reduced once again compared to a pure equity portfolio. Finally, spreading investments across a wide geographical area leads to a further reduction in risk. Interestingly, a portfolio's return potential increases with geographical diversification, e.g. adding foreign equities to a Swiss equity portfolio. Hence, security-conscious investing always requires systematic international diversification. A broad diversification with dozens or hundreds of individual stocks is only possible with substantial assets or investment funds.

Dividend indices

Dividend indices follow strict rules in order to safeguard exposure to higher-than-average yielding dividend stocks

Dividend yield

The return that the annual dividend of a share represents in relation to the current share price. Calculated by dividing the annual dividend per share by the current market price.

Dividend-focused strategy

weights selected stocks according to their dividend yields, i.e. higher yielders receive a higher allocation, with the intention of harvesting dividends

Dividends

The share of a company's net profit distributed on equities, participation certificates, cooperative shares or dividend-right certificates.

Domestic bonds

Bonds issued by domestic borrowers in their own currency on their home market.

Double taxation agreement (DTA)

International treaties which Switzerland has concluded with other countries to ease or prevent double taxation. Double taxation occurs when a taxpayer is taxed for the same taxable object or tax process by two different governments. A DTA may make it possible for the withholding tax deducted in Switzerland to be reclaimed, in whole or in part, by foreign investors (investors who are not tax residents in Switzerland) on their tax returns.

Double taxation relief

Companies or individuals with profits or income arising abroad may suffer withholding tax on amounts remitted to the UK. The profits or income may also be subject to UK tax. A double taxation agreement aims to prevent or give relief for double taxation. It provides that income will be taxed in one country only or, if taxed in both, that one country will allow credit for tax paid in the other.

Duration

The duration represents the length of time for which capital is "tied-up" in a bond investment. In contrast to residual maturity calculations, the concept of duration takes account of the time structure of returning cash flows (such as coupon repayments). The average duration of the portfolio is derived from the weighted average duration of the individual securities. The "modified duration" is derived from the duration and provides a measure of the risk with which the sensitivity of bonds or bond portfolios to interest-rate changes can be estimated. A 1% increase (decrease) in the interest level accordingly produces a percentage fall (rise) in the price in proportion to the modified duration. For example: the modified duration of a bond fund is 4.5, the theoretical yield to maturity is 5.3%. If the yield drops by 1% to 4.3%, the fund price increases by around 4.5%.

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